Bitcoin’s rise is not enough to dethrone the powerful dollar

Bitcoin’s rise is not enough to dethrone the powerful dollar

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Bitcoin was up about 5% on Tuesday afternoon, while the US dollar index fell 0.6%.

“As more and more companies start accepting bitcoin, this will only lead to further increases in demand in a market with limited supply,” wrote Fawad Razaqzada, an analyst at ThinkMarkets, in a note to customers.

“Bitcoin is becoming an alternative asset,” said Brad Bechtel, global head of FX at Jefferies. “It is not related to anything else on the market.”

And that makes it an attractive asset to add to a portfolio, said Bechtel.

This is quite optimistic for the long-term perspective of bitcoin, even though some, notably Bank of America, have called the crypto rally “the mother of all bubbles”.

But don’t turn all your struggling dollars into bitcoin just yet.

The US dollar is the world’s reserve currency, which means that companies, countries and central banks keep it in their accounts. It is also the most widely used currency in transactions worldwide.

Of course, the euro and China’s yuan have become more popular in recent years and cryptocurrencies have entered the picture. But, for now, there is nothing to undermine the status of the dollar.

Bitcoin grew by more than 30% in February alone – an impressive increase. But “this kind of price action is just the opposite” of what reserve investors are looking for, “Marc Chandler, chief market strategist at Bannockburn Global Forex, told CNN Business. “Instead of making it more attractive as a reserve asset, it makes it less attractive, because volatility is risk.”

Reserve investors, like central banks, do not seek the greatest return. Instead, they look for investments that preserve value. And while bitcoin’s volatility may decrease as the cryptocurrency market matures, it hasn’t happened so far.

Another reason why bitcoin is not about to become the world’s reserve currency is that it is not really a currency, Chandler wrote on his blog. “[Cryptocurrencies] they do not meet the definition of money economists: means of exchange, reserve of value and unit of account, ”he said.

Weaker dollar under Biden

The reserve status of the US dollar may not be at risk yet, but there is a high chance of will continue to weaken in the short term.

President Donald Trump has repeatedly expressed his desire for a weaker dollar while in office, but global trade tensions and geopolitical swings have increased his safe haven status and made the dollar attractive to investors.
Conditions look a little different for President Joe Biden and the dollar may weaken as a result of the new government’s economic agenda, including more government stimulus.
Interest rates are very low and the Federal Reserve he signaled that they will stay there until recovery is well underway. This makes the American currency less attractive to investors.

US Treasury yields, which follow interest rate expectations, have recently increased amid hopes of a faster economic recovery. But Capital Economics economists do not think this trend will last, given the Fed’s position on low rates.

The launch of the vaccine in conjunction with continued government support could lead to a mini economic boom in the summer and lead more optimistic investors to take some risks. That would be bad for the super-safe US dollar, as these investors might prefer more risky currencies.

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